Israel's war on Gaza has captured attention since October 2023, and many have been dismayed that the new National-Act-NZ First Government has appeared to do little to slow the bloodshed. This Government was quick to act when Houthi drone strikes appeared to disrupt commercial shipping interests.

This began in January 2024, soon after the beginning of these strikes, when the New Zealand government "expressed its support for strikes against Houthi targets in Yemen threatening commercial shipping in the Red Sea". Houthi drone strikes on commercial shipping operations linked to Israel had compelled shipping giants to re-route trade away from the Suez Canal and around the Cape of Good Hope instead.

Expressing support for the Anglo-American operation seemed a significant reorientation of New Zealand's foreign policy. The scale of this reorientation was magnified by the announcement two weeks later that the Government would deploy a six member Defence Force team to the Middle East "to uphold maritime security in the Red Sea". New Zealand was not just in agreement with the strikes, it was committing resources to prevent them. It appears we are now at war with the Houthi movement.

Left voices across the country decried the decision to intervene in the Red Sea, while so little has been done to prevent the sustained slaughter of innocents in Gaza. Calls for sanctions on the Israeli government had been met with deafening silence, and it was not until 15 February that the NZ government issued the joint statement with Australia and Canada condemning plans for a ground invasion of Rafah and calling for a humanitarian ceasefire.

Despite military efforts to free up the Red Sea trade, most major shipping companies are staying clear of the route, with insurance rates rising to prohibitive levels. Shipping cost indexes showed a more-than-tripling in container freight prices on Asia to Northern Europe routes, as the longer route added weeks to the journey.

While shipping companies experienced mega profits during the cost of living crisis, tightening interest rates from central banks is bludgeoning demand for the consumer goods, and the transport operators that bring goods to market. For major players in the shipping industry, rising shipping rates presented opportunities to soften the blow of a radical gear change affecting their profitability.

The scale of profits earned by shipping companies during the cost of living crisis is worthy of discussion. The world's largest shipping company is the notoriously-secretive Mediterranean Shipping Company (MSC), however, in October 2023, Italian media revealed its financial performance for the first time. MSC's holding company is reported to have earned profits of €36.2 billion ($NZ63.4 billion) for the previous year off turnover of €86.4 billion, a profit margin of 42%.

Publicly-listed AP Moller Maersk ("Maersk"), which accounts for around 14% of global shipping activity, provides further insight. Analysis by the Centre for International Corporate Tax Accountability and Research shows that from the first quarter of 2020 to the third quarter of 2022, Maersk's quarterly profit increased by a staggering 26 times. Across 2021 and 2022 it earned $US49 billion ($NZ79.2 billion).

Demand For Maritime Transport Is Collapsing

While most of the shipping companies that shared in the spoils paid out record dividends to shareholders, many also invested in new ships, boosting international shipping capacity. Ironically however, as these vessels are delivered, demand for maritime transport is collapsing. Combatting the global cost of living crisis - in part caused by the surge in global shipping costs from 2021 - has led central banks around the world to hike interest rates aggressively. As the impact of restrictive interest rates sink in, consumer spending cools, reducing demand for goods traded across borders, as well as the transport providers that deliver them to market.

This is the scenario facing transnational shipping companies today, with fortunes rapidly changing from the eyewatering record profits of 2022 to possible losses in 2024. The Red Sea bottleneck therefore provides a potential avenue to ameliorate the impact of this change. Adding weeks to transit times has the potential to swallow a significant chunk of otherwise unused shipping capacity, allowing shipping companies to reduce the rate at which margins may otherwise be collapsing and shifting costs back onto wholesalers and retailers in the supply chain (who in turn aim to shift it back onto the consumer as much as possible).

Allegiances Will Have To Be Reassessed

Despite Anglo-American airstrikes in Houthi-controlled areas of Yemen, a recent drone strike on the USS Carney in the Gulf of Aden showed that Houthi capacity has not been materially weakened by strikes so far. For now, the Red Sea and Suez Canal remain off limits to international shipping companies that continue to trade with Israel.

The idea that the Red Sea is completely off limits is simply untrue. A number of Chinese shipping lines, such as Transfar Shipping and China United Lines have refocused their operations in the region, apparently agreeing to comply with the Houthi demands not to trade with Israel. Bloomberg is reporting that Chinese-owned merchant ships operating in the Red Sea are receiving hefty discounts on insurance in the region.

What we are seeing, in other words, is a reshaping of commercial opportunities in light of changing geopolitics. While the NZ Coalition government has focused heavily on economic opportunities (including trade), its willingness to uncritically align with Western nations that have enabled Israel's atrocities in Gaza brings with it economic risks. Commercial operators throughout the supply chain will also have to take steps to reassess their allegiances.

Watchdog - 165 April 2024